Viewpoint: Is a government like a business?

In the past, there was a virtual consensus that running a government was unlike running a business. The argument that businesses had a profit motive while governments ran on a budget was enough to make the case. The disadvantages of budgeting were well understood, but since there was no generally accepted alternative, the question was considered settled.

That is no longer the case. Tycoons are increasingly powerful, getting into, sometimes even leading, government and applying their business experience to running the government. They prove that there are many more differences between running a government and a business, and that running a government like a business can easily become counterproductive. Here are some examples.

Bullying

A big business can use its economic weight as a negotiating tactic. It can force its own rules on small suppliers, like auto companies do with their part suppliers, importers and dealers. The limit to such behaviour is competition rules, as Apple is finding out, now that its restrictions on developers are questioned. Significantly, Apple does not understand the problem, arguing that those restrictions are consumer protection.

One step further is using the fact that, presumably for reasons of cost-cutting, legal systems are highly rigged against small claims. By building an intimidating legal barricade inside even a medium-sized company, non-payment of small sums becomes profitable for the company while suing is unprofitable for the creditor. The limit of this approach is the loss of creditworthiness.

Such an approach is highly counterproductive when governments use it. Even though competition rules do not apply, governments are held to the same standards in public opinion. Withholding government contracts to businesses that are thought of as non-compliant with government policy will quickly raise voters’ ire if the government policy in question is not broadly accepted. When the target company is very deeply involved in government business, the government may even be unable to replace the supplier with another, as is the case with SpaceX.

In international relations, bullying results in a broad and deep loss of trust as well as loss of allies. That, in turn, results in diplomatic isolation in international cooperation, as well as military vulnerability. Both increase cost. In addition, these consequences are hard to repair. Trust comes on foot but leaves on horseback.

Evading regulation

Even domestic companies are constantly looking for ways to evade the legal framework. After the First World War, French bakers along the German border enjoyed a competitive advantage by using the fact that compulsory Sunday closing did not apply to bakers in France, but closed to German bakers.

Construction companies used foreign and illegal labour to enforce their own draconian behaviour and avoid local labour laws. Similarly, clothing companies used child labour in poor countries and avoided safety rules by outsourcing. Online-based companies avoid paying local taxes and undermining local work rules. Financial companies can use offshore havens. Multi-national companies can assign their profits to establishments in several countries. Those that sell directly to consumers may be able to avoid border taxes by using de minimis exceptions.

Governments can get away with evading their own rules by exceptions in the law, including “special economic zones”, where taxes are waived for goods destined to be exported. Ignoring the law, as by illegal mass firings, is taken as an attack against democracy, though. Evading the laws of other countries is likely to get a response. The countries that offered “cheap flag” treatment for ships have largely fallen into line. De minimis clauses were ended. Offshore business is increasingly regulated, and now the abusive online companies have come under scrutiny. Their case is more difficult because all are American, but in the current political climate, that advantage is diminishing.

Mergers, acquisitions and sovereignty

Companies can use M&A to expand or acquire new skills quickly, but also to get rid of competition. The limits on this, in principle healthy, behaviour are not only competition rules, but also an increasing awareness that M&A seldom works out as expected and that conglomerates (collections of non-related companies) don’t work at all.

China is learning that heavy investments in harbour projects with the aim of controlling trade flows do not work. Similarly, buying resource-producing companies, like mines, and earmarking their production for their own country has turned out to be a costly mistake. The US is still very low on this learning curve. Conquest is frowned upon almost everywhere. Countries are never for sale, and forced resource agreements will crumble as situations change. Sovereignty is not a commodity. It can be given up partially for the benefit of all those participating in a joint project. Pushing for more is pushing for war.

Peter Kraneveld is an international pensions adviser at Prime BV